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Making Sense of Network Responsibilities for ARs

We consider the implications of the recent successful appeal to the Court of Appeal by a network of Independent Financial Advisers, Sense Network Limited, against a number of claims about the fraudulent activities of one of the network's Appointed Representatives. 

This is an important decision because it is the first time that the Court of Appeal has considered such issues around the liability of a network for the unauthorised activities of an appointed representative, although the issue has been considered recently at first instance.

Background Facts

Sense Network Limited ("Sense") had an Appointed Representative ("AR"), Midas Financial Services (Scotland) Limited ("Midas").  Unbeknownst to Sense, Midas operated a Ponzi scheme that defrauded around 279 clients of around £13.6m.

Subsequently, 95 clients of Midas brought claims against Sense seeking recovery of their losses on the basis that Sense was responsible for the activities of Midas as its AR under s. 39 Financial Services and Markets Act 2000 ("FSMA"). 12 Claimants were chosen as lead claimants, and their claims were heard at trial in July 2018. In October 2018, the Court dismissed their claims, ruling that there was no question of the AR having any actual or ostensible authority to run the scheme, following which the Claimants appealed to the Court of Appeal.

Court of Appeal

David Richards LJ gave judgement for the Court of Appeal, dismissing the appeal.

The Court gave detailed consideration to the purpose of section 39 FSMA, concluding that it did not make Sense liable for all activities undertaken by Midas, but only those for which Sense had accepted responsibility in writing.  Sense had not authorised Midas to carry out the Ponzi scheme in question: it fell outside the scope of the business for which Sense had accepted responsibility in writing, hence it was not liable to Midas' clients for Midas' acts.

However, the Court also agreed with a number of recent first instance decisions holding that it was not possible to separate an AR's authorised advice from its incidental unauthorised advice and that a network should be liable where an AR carries out authorised activities in an unauthorised way, e.g. giving kickbacks to clients to make investments that the AR is authorised to advise on.

Separately, the Court left open the question of Sense's vicarious liability at common law for the activities of its AR.  This was because of a technicality, which prevented the Claimants from appealing the issue because it turned on a finding of fact rather than law.

Finally, the judgement gave a fairly wide definition to the meaning of an Unregulated Collective Investment Scheme ("UCIS").

Comment

This is a clear and well-reasoned judgment, which should be followed by all courts below the Court of Appeal.  It should also be taken seriously by the Financial Ombudsman Service ("the FOS") when considering similar complaints.  Whilst the FOS is not bound by the Court of Appeal's judgment in the same way as lower courts, the quality of the judgment is such that it is may be uncomfortable for the FOS to deviate too much from the Court of Appeal's findings, without running the risk of a Judicial Review for being irrational.

It is a welcome judgment in so far as it brings clarity to the liability of networks for their ARs.  Helpfully for networks and their insurers, the Court of Appeal rejected the Claimants' argument that Sense should be liable for all of Midas' acts, and held that Sense was only liable to the extent that it had authorised Midas' activities.

However, this judgment also contained less helpful elements for networks and their insurers.  Most importantly, the Court of Appeal upheld recent first instance decisions that held networks liable for ARs' unauthorised activities that were incidental to the activities that they were authorised to carry out.  Sense was not held liable by the Court because Midas was simply taking client's cash to invest in a Ponzi scheme, without Sense's knowledge.  If, instead, Midas had advised the Claimants to cash in legitimate investments, which Midas was authorised by Sense to advise on, and then advised the Claimants to put that cash in the Ponzi scheme, then Sense may have been found liable to the Claimants.

This judgment also rests on a finding that Sense properly supervised Midas.  It may therefore not apply in any instance where there has been a failure by a network to supervise an AR properly, or where the Network could/should have been aware of the AR's unauthorised activities.

In summary, this is a useful and helpful judgment for networks and their insurers facing claims about an AR's unauthorised activities.  However, as is often the case, much depends on the specific facts of the case, so it is unlikely to provide networks with a blanket defence to such claims in other circumstances, especially where the AR has also given authorised advice, or where the network has not properly supervised the AR.

Contact

Please contact Jonathan Hyde Director, jonathan.hyde@dwf.law

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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